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Risk Premia In The Term Structure Of Interest Rates: A Panel Data Approach

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Author Info
Bams, Dennis
Wolff, Christian C

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Abstract

This paper proposes a panel data approach to modeling the risk premium in the term structure of interest rates. Specifically, we develop a fixed maturity/random time effects model that implies a time-invariant one-factor model. Our approach allows us to disentangle risk premia and unexpected excess returns, which is not possible in the standard time series approach. In addition, small sample bias is alleviated and statistical efficiency improved. Our results allow for interesting inferences about maturity-specific effects in the term structure. First, the expectations hypothesis is soundly rejected for our full data panel of U.S. Treasury securities. Second, a considerable degree of mean reversion is present in the risk premia. Third, our findings shed new light on the magnitude of the slope coefficient in regressions of the yield onto the forward curve.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2392.

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Date of creation: Feb 2000
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Handle: RePEc:cpr:ceprdp:2392

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Related research
Keywords: Expectations Hypothesis; Risk Premium;

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Melino, Angelo, 1988. " The Term Structure of Interest Rates: Evidence and Theory," Journal of Economic Surveys, Blackwell Publishing, vol. 2(4), pages 335-66.
    Other versions:
  2. Mishkin, F.S., 1988. "The Information In The Term Structure: Some Further Results," Papers fb-_88-26, Columbia - Graduate School of Business.
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  3. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June. [Downloadable!] (restricted)
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  4. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December. [Downloadable!] (restricted)
  5. Campbell, John Y, 1986. " A Defense of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 41(1), pages 183-93, March. [Downloadable!] (restricted)
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  6. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Cowles Foundation Discussion Papers 667, Cowles Foundation, Yale University. [Downloadable!]
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  7. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-99, September. [Downloadable!] (restricted)
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  9. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October. [Downloadable!] (restricted)
  10. Hamburger, Michael J & Platt, Elliott N, 1975. "The Expectations Hypothesis and the Efficiency of the Treasury Bill Market," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 190-99, May. [Downloadable!] (restricted)
  11. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Balázs Romhányi, 2005. "A learning hypothesis of the term structure of interest rates," Macroeconomics 0503001, EconWPA. [Downloadable!]
  2. Richard D. F. Harris, 2004. "The rational expectations hypothesis and the cross-section of bond yields," Applied Financial Economics, Taylor and Francis Journals, vol. 14(2), pages 105-112, January. [Downloadable!] (restricted)
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